CORPORATE OWNERSHIP

Corporate ownership is one of three broad categories of legal ownership of
a business, the other two being sole proprietorship and partnership. In a
sole proprietorship, the owner is personally liable for his or her
business's debts and losses, there is no distinction made between
personal and business income, and the business terminates upon the death
of the owner (unless some specific arrangement is made for someone to
inherit the business). A partnership is merely joint ownership, and hence,
in terms of personal liability, it is similar in every way to a sole
proprietorship. Both categories of business ownership are simple
arrangements that can be entered into and dissolved easily, without even a
written contract, sometimes merely by shaking hands.

Corporate ownership, on the other hand, is much more complex, because it
involves the creation of a legal identity separate from those of its
owners. While an individual may own all the shares of a corporation, he or
she is not personally responsible for it. That is because a corporation
is, strictly defined, a legal entity that is "immortal"
(does not terminate upon the owner's death), which can enter into
and dissolve contracts, incur debts, sue or be sued, own property and sell
it, as any individual may do.

The corporation is rooted in medieval European history. Long before there
were viable urban centers in Western Europe, monastic orders existed
independently of their membership. All assets belonged to the order,
rather than to the individual member. Monastic orders and, eventually,
universities and towns, became the earliest forms of corporations. By the
High Middle Ages, corporations had become so widespread that their status
needed legal definition. In the 15th century, English high courts
elaborated a legal principle inherent in all corporations: limited
liability. Henceforth, creditors of a bankrupt corporation could not sue
individual owners of corporate stock for the recovery of debt, the
corporation being solely responsible for losses. Hundreds of years later,
the U.S. Supreme Court refined the status of corporations still further.
In
Santa Clara County vs. Southern Pacific Railroad
in 1886, the Court ruled for the first time that
a corporation was a legal person, with the same rights, privileges, and
responsibilities.

Corporate ownership has evolved over the centuries to the point where,
today, there are several major types. Private, for-profit corporate
ownership characterizes the majority of present-day corporations. Most of
these are general business or C corporations. These can determine whether
corporate profits are paid out to stockholders (or, as the case may be, to
the sole stockholder), or remain with the corporation. Many artists and
other professional people, however, prefer to file for
S corporation
status, where "S" stands for small business, in which
profits go entirely to the individual shareholders (or sole shareholder)
as personal income, and are taxed as such. By definition these are among
the smallest corporations and must observe several restrictions in order
to maintain their S status.

Other major categories of corporate ownership are public, quasi-public,
nonprofit, and foreign. A public corporation (not the same as a publicly
traded corporation) is created solely for government purposes, as, for
example, a school district. Quasi-public corporations are not established
with the sole purpose of carrying out government objectives, but they do
serve the same clientele, namely, the general public. Utility companies
are the most prevalent type of quasi-public corporation. A nonprofit
corporation is established for charitable purposes, rather than for the
purpose of making a profit or serving a public need. Hence while private
nonprofit corporations can and often do generate profits, these profits
are not taxed and are reinvested in the corporation, distributed back to
the membership, or donated to other charities. "Foreign
corporation" can refer to two kinds of entities: (1) a business
incorporated in one state that is doing business in another, where it is
said to be "foreign"; or (2) a corporation owned by a
non-U.S. entity. For the most part, corporations controlled by a non-U.S.
owner are treated the same under the law as those that are domestically
held.

Because all categories of corporations enjoy limited
liability—stockholders can never lose more than they have invested
in the corporation, and they are not liable for any of the
corporation's debts—they have become the most prevalent
business organization in the United States, Europe, and Japan. For the
self-employed person in the United States, a compelling reason for turning
a sole proprietorship into a corporation has been the opportunity to
qualify for
workers' compensation,
and to obtain full health coverage (the entire cost of which can be
claimed as a business expense). In all countries where corporate ownership
is legal, corporate taxes are significantly lower (30-50 percent) than for
a sole proprietorship. Similarly, complete exemption from federal, state,
and local taxes is the prime incentive for establishing a nonprofit
corporation.

The process of incorporation, either for a sole incorporator or a group of
people, is an uncomplicated one. All corporations are registered at the
state level. The process begins by choosing a corporate name that is not
duplicated by any other corporation, and complying with the state's
filing requirements. All states require an employer identification number,
and the filing of articles of incorporation, the contents of which may
vary from state to state. The articles of incorporation establish the
company's name, the purpose of forming the company, the number and
amount of the company's authorized stocks, the resident
agent's name and address, and the name and address of any other
corporate officer. Most but not all states require that the filer show
evidence of an organizational meeting (such as a copy of the minutes).
Only after the articles of incorporation are filed and accepted in the
appropriate state, do corporations acquire legal existence.

Usually a small incorporation fee is required, and in some states a
minimum corporate tax must be paid in advance. Virtually all states levy
corporate income taxes, as well as sales and other taxes. In addition,
there is a federal corporate income tax, which is usually a flat-rate
amount instead of a graduated tax. The exception is the excess
profits tax,
which is graduated and based on the amount of invested capital rather
than on earned profits. Since 1981, federal tax legislation affecting
corporations has been passed annually.

Some states are regarded as having incorporation laws that are more
favorable than others. The traditional choice for those seeking
incorporation has been Delaware, for reasons outlined below, although
legal reforms in many states have eliminated several of Delaware's
advantages. Various estimates suggest that still more than half of major
U.S. corporations are incorporated under Delaware law, which is considered
highly pro-business. Among the benefits Delaware incorporation confers
are:

a rapid incorporation process

liability protections for directors

antitakover protections

a thoroughly tested and predictable corporate legal system

possible tax advantages for holding companies

no minimum capitalization requirements

ownership anonymity

However, a number of state governments, notably Nevada and Maryland, have
liberalized their corporation laws to make their states more business
friendly, and some may even offer certain benefits Delaware lacks. As a
result, medium- to large-sized businesses are choosing to incorporate in
other states more frequently than once was common.

Given corporations' unique legal status, perhaps it is no surprise
that they are used for diverse business and legal purposes outside the
traditional sense of a small (or large) business incorporating itself. New
corporations may be created as permanent or temporary holding companies
for major corporations, particularly during a major corporate merger or
restructuring. Individuals and businesses may also use corporations as tax
shelters to channel funds through or as privacy barriers to provide
indirect ownership of something, such as real estate or another company.